The Questor column

The Questor column

Edited by Helena Keers

(Filed: 17/07/2004)

Best to give perishing Big Food Group the cold shoulder

For investors, BFG has proved not so much of a Big Friendly Giant, more a Big Financial Grind. The acronym stands for Big Food Group, and the company owns the Iceland and Booker chains.

Bill Grimsey, who has been in charge at the company for three years, took on a mammoth task when he started at the business, and there's not much evidence that he's anywhere near the end of it. The company was chronically underinvested, and even though he's having some success refurbishing the Iceland stores, it's a race against time, because the ones that aren't refurbished are continuing to decline at a massive rate.

Iceland is also having problems in the competitive environment, with the takeover of Safeway by Morrisons and Sainsbury's coming under new management. These prompted yet another bad trading statement from the company earlier this week, which many interpreted as a profits warning. This is an occurrence with which shareholders are becoming familiar.

Booker is also struggling, as the figures this week showed. Analysts moved to trim their forecasts and few could see a bright spot at the end of the tunnel. Supermarket competition will increase, not decrease, and although the company is continuing with its refurbishment and cost-cutting plans, frozen food is becoming a less popular choice for many shoppers.

The shares, to be fair, don't look expensive at 82.5p this week, compared with well over 150p early this year and 346p in 2000. They trade on seven times forward earnings with a prospective 4pc dividend yield. However, there's no indication that the shares are out of the ice age just yet and they are best avoided.

Put your faith in St Modwen

Questor rarely has a bad word to say about St Modwen and last tipped the regeneration specialist in January when the shares were trading at 230p. At 288p this week, after another set of solid interim results, shareholders have good reason to hold on.

St Modwen revealed pre-tax profits up 23pc to £22.1m in the six months to the end of May, after the sale of the Pubmaster investment and residential land at Springfields, Stoke-on-Trent.

The company also enjoyed a 17pc hike in net asset value to 195.3p and had a busy time snapping up 228 acres at Longbridge in Birmingham from MG Rover in a sale and leaseback deal for £42.5m, and a 600-acre site from Corus at the former Llanwern steelworks near Newport.

St Modwen, with Anthony Glossop and Bill Oliver at the helm, delivers like clockwork because it has a high yielding and cash generative investment portfolio made up of shopping centres and offices across the country.

While there have been slight delays with projects, such as the north London shopping centre at Edmonton Green, the group is keen to push through the public sector work. Wembley Central and Longbridge now have planning consents and the former should move forward by Christmas.

St Modwen expects to enjoy a 12th consecutive year of record full-year results and reckons it's in line to double the net worth of the company every five years.

The group is trading at a 47pc premium to net asset value, which is very unusual in the sector and does not make the shares look cheap. However, yielding a forecast 2.5pc and trading at a prospective 12 times earnings, the shares are still worth holding.

Inter Link serves up a tasty treat

Inter Link Foods sees its 10th anniversary this year and no doubt one of its celebration cakes will be on the menu. The company has made nine acquisitions in those 10 years and Mr Hamer says that snapping up Hoppers Farmhouse Bakery in January is the latest, but not the last.

The company makes everything from Disney branded small cakes to mince pies and (since buying Soreen last year) malt loaves. But it's not just the acquisitions that have been driving growth; sales rose 35.5pc to £69.6m last year and 11pc of that came from organic growth. Inter Link reported a 33pc rise in pre-tax profits to £3.94m in the year.

Analysts say the company has a fairly lean management structure compared with larger food companies and has vowed to become the number two cake supplier in the UK - it is currently number three, behind Northern Foods.

Mr Hamer says this will come about through more product development and building on the company's position as a low-cost manufacturer. Brokers expect sales of £90m this year, and Mr Hamer says if Inter Link has a "brilliant" year, it could reach the number two spot as early as 2005.

This week the shares were trading at 462.5p, not far off the 460p in February when Questor advised holding on. The shares are trading at 9.5 times forecast earnings with a prospective yield of 1.3pc. This cake still has the potential to rise. Keep it in the store cupboard for now.